This document provides an illustrative example of valuing intangible assets for Shockwave Corporation, a Canadian satellite radio provider. Shockwave was acquired for $1.2 billion, with $0.5 billion in tangible assets. The purchaser requests valuing Shockwave's intangible assets, including tradename, on-demand technology, customer relationships, broadcast license, program content, and assembled workforce, using relief from royalty, excess earnings, cost, greenfield, and with or without methodologies. Historical financials are presented and an acquisition forecast is provided to estimate future cash flows for valuing the identified intangible assets.

1. Illustrative Example of
Intangible Asset
Valuation
Shockwave Corporation
Working Party No. 6’s Special
Session on the Transfer Pricing
Aspects of Intangibles

2. Foreward
This presentation contains general information only and none of Deloitte Touche
Tohmatsu, its member firms, or affiliates (“Deloitte”), by means of this
presentation or its publication, rendering accounting, business, financial, tax,
legal, investment or other professional advice or service. The opinion expressed
within this presentation are my own and do not necessarily represent positions,
strategies or opinions of Deloitte, nor The Canadian Institute of Chartered
Business Valuators. This is not an official presentation from Deloitte. The
presentation is for general information purposes only and should not be
considered as a substitute for professional advice and counsel.
2
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
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3. Introduction
Intangible Asset Valuation
3
© Deloitte & Touche LLP and affiliated entities.

4. Introduction
Methodology Recap
Illustrative Example
Conclusion
Overview
1. Valuation process
2. Methodology Recap:
• Reflief from Royalty
• Excess Earnings
• Cost
• Greenfield
• With or Without
3. Illustrative Example – Shockwave Case Study
• Tradenames
• Content
• Workforce
• License
• Customers
• Technology
4. Reasonability
• Weighted Average Return on Assets
4
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
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5. Introduction
Methodology Recap
Illustrative Example
Conclusion
Valuation Process
Value
Conclusion
Reasonableness
Project Planning
Analysis
Diligence
Identification
Scoping
Purpose
Step 7
Step 6
Step 5
Step 4
Step 3
Step 2
Valuation
Step 1
5
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
© Deloitte & Touche LLP and affiliated entities.
©THE CANADIAN INSTITUTE OF CHARTERED BUSINESS VALUATORS

6. Methodology Recap
Intangible Asset Valuation
6
© Deloitte & Touche LLP and affiliated entities.

7. Introduction
Methodology Recap
Illustrative Example
Conclusion
Relief from Royalty
Description
Frequent Applications
• Brand (most common);
Determines value by reference to the hypothetical
royalty payments that would be saved through
owning the asset, as compared with licensing the
asset from a third party.
• Technology; and,
• Know-how.
1
2
t
FV = PV(r) ∑
4
t=0
Key Inputs
Revenue
x
Royalty (1 – tax)
3
Diligence Matters
1
• Revenues that are not attributable to the intangible
(i.e. non-brand product revenues)
2
Expected life of the intangible
• Length of economic benefit of the asset
3
Notional royalty rate applicable to the
intangible
• Appropriateness of observable comparables used to
derive a notional royalty rate
4
7
Revenue forecast associated with the
intangible asset being valued
Discount rate
• Risk premiums included in the discount rate
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
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8. Introduction
Methodology Recap
Conclusion
Illustrative Example
Excess Earnings
Description
Frequent Applications
The present value of the earnings attributable to the
subject intangible asset after providing for the
proportion of the earnings that attribute to returns for
contributory assets. In order to determine a fair
return „on‟ and/or „of‟ these contributory assets, their
value must be capable of being determined in
priority.
5
t
• Customer relationships
• Vendor relationships
• Order backlog
• Technology
1
• IPR&D
• Licenses
Revenue
2
FV = PV(r) ∑ Expenses
6
Key Inputs
t=0 3
4
CAC‟s
7
PV(r)
+ Tax
Benefit
Diligence Matters
Taxes
1
• Revenue migration/attrition rate
2
Applicable expenses
3
Contributory asset charges (“CAC”)
• Expenses saved or to be excluded from the earnings
attributable to the asset (i.e. S&M)
4
Expected future tax rates
5
Expected life
• Valuation/selection of the contributory assets and the
rates of return used in calculation
6
Discount rate
• Consistency of expenses and CAC‟s
7
8
Applicable revenue forecast
Tax amortization benefit (asset values, tax
rates, tax amortization rates)
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
• Risk premiums included in the discount rate
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9. Introduction
Methodology Recap
Conclusion
Illustrative Example
Cost
Description
Frequent Applications
Estimates the fair value of an asset by approximating
its depreciated replacement cost, which would
include all costs necessary to construct a similar
asset of equivalent utility at prices applicable at the
time of reconstruction.
• Licenses and permits;
• Certifications;
• Internally-generated software; and
• Workforce.
The cost approach is based on the premise that a
prudent third-party purchaser would pay no more for
an asset than its replacement cost.
1
Key Inputs
2
Replacement Cost New
– Obsolescence Factors
1
All hypothetical costs that are needed to recreate
the asset including materials and labour
2
Adjustment factors to reduce the replacement
cost to the functional, economic, and
technological condition of the subject asset
Diligence Matters
• Inclusion/exclusion of any overhead costs and the
allocation rate used;
• Inclusion of opportunity costs;
• Functional, economic, and technological adjustment
factor assumptions
• Inclusion of taxes or tax shield
9
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
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©THE CANADIAN INSTITUTE OF CHARTERED BUSINESS VALUATORS

10. Introduction
Methodology Recap
Conclusion
Illustrative Example
With or Without
Description
Frequent Applications
Estimates the fair value of an asset by comparing
the value of the business inclusive of the asset, to
the hypothetical value of the same business
excluding the asset.
• Non-competition agreements;
• Franchises; and
• Processes and technologies.
1
Revenue
3
Expenses
Taxes
1
Free cash flow forecast for business „with‟ asset
2
Enterprise-wide discount rate
3
Expected life of business
4
Free cash flow forecast excluding subject asset
5
Enterprise-wide discount rate excluding asset
6
Expected period to replace asset + costs
7
10
Revenue
6
7
PV3(r)
FV = PV1(r) ∑
– PV2(r) ∑
+ Tax
t=0
t=0
CapEx/WC
2
5
CapEx/WC Benefit
t
Key Inputs
4
t
Expenses
Diligence Matters
Taxes
Tax amortization benefit (asset values, tax
rates, tax amortization rates)
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
• Identification of incremental income
• Length of recreation period and pattern of ramp-up
• Assumption around competition and market share
• Cost of recreation
• Incremental risk to business cost of capital excluding
asset
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11. Introduction
Methodology Recap
Illustrative Example
Conclusion
Greenfield
Description
Application
• Non primary income generating assets
Estimates the value of the asset based on the
discounted cashflows of a notional start-up business
with no assets but the subject intangible.
• Licenses and permits;
• Rights (i.e. Water, cutting, mining)
• Franchise agreements
1
Revenue
4
t
Expenses
t=0
CapEx/WC
PV(r)
+ Tax
Benefit
2
FV = PV(r) ∑
3
Key Inputs
Taxes
Diligence Matters
1
2
Expected ramp-up period and pattern
• Support for start-up levels of income and capital
costs
3
Start-up-type discount rate
• Support for length and pattern of ramp-up
4
11
Start-up cashflow forecast, including capital costs
Tax amortization benefit (asset values, tax rates,
tax amortization rates)
• Assumption around competition and market share
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
• Incremental risk premiums in discount rate to reflect
start-up nature of cashflows
© Deloitte & Touche LLP and affiliated entities.
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12. Introduction
Methodology Recap
Illustrative Example
Conclusion
Discount rate considerations
WACC
WARA
Discount rate
Considerations
• > WACC
• > cost of equity
• > returns on
other assets
• Cost of equity
Equity
Intangible Assets
• In between rates
for tangible
asset backing
and goodwill
Risk
ENTERPRISE VALUE
Goodwill
• Lease rates
• Mortgage rates
Fixed assets
• Asset-backed
lending rates
Debt
• Short-term
borrowing rate
Working Capital
Reward
12
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
© Deloitte & Touche LLP and affiliated entities.
©THE CANADIAN INSTITUTE OF CHARTERED BUSINESS VALUATORS

13. Illustrative Example
Shockwave Corporation
13

14. Introduction
Methodology Recap
Illustrative Example
Conclusion
Shockwave Corporation: Business Overview
Business Overview
• Shockwave Corporation is Canada‟s largest satellite radio provider. Shockwave commenced operations five
years ago when the Canadian government granted satellite spectrum licenses to four Canadian start-ups
seeking to cultivate a then burgeoning industry for Canada. Since that time, precipitated by the accelerating
wireless data needs of telecommunication industry technology, the government has stated that it will not be
licensing any new spectrum for satellite radio, but may approve the sale or transfer of existing spectrum.
• Shockwave generates its revenue from monthly subscriptions to consumers sourced via a direct retail sales
channel (i.e. direct mail, print and television advertisements, billboards, and retail in-store kiosks).
• Shockwave does not manufacture the satellite radio receivers used by consumers, but transmits signals that
can be received by a unit once the unit is registered/activated as an Shockwave unit.
• After five years of research and development activities, Shockwave developed a proprietary software
technology for the transmission of „on-demand‟ radio content. As a result, Shockwave created six new ondemand premium subscription stations exclusively broadcasting educational programs covering Parenting,
Finance, History, Motivational topics, Biographies, and Cooking. This premium service is only offered to
customers that are on a „regular subscription‟, and are not available separately. The success of this novel
business was immediate, generating incremental revenues of approximately $45 million last year.
• Most of Shockwave‟s „regular‟ music and talk radio content is acquired from third-party sources, based on
normal recording industry royalty-based pay scales. However, for the exclusive broadcast on its premium „ondemand‟ channels, Shockwave produced an archive of over 1,000 twenty- to sixty-minute proprietary programs
protected by copyright created via internal publishers and third-party consultants (i.e. doctors, professors, and
professionals).
• Two of Shockwave‟s competitors operate in the B2B space, providing satellite radio content to the airline, and
commercial real estate industries, respectively. These competitors have unbranded product offerings.
14
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15. Introduction
Methodology Recap
Conclusion
Illustrative Example
Shockwave Corporation: Valuation of Intangibles
On January 1, 2011, the shares of Shockwave were acquired for $0.8 billion. The net debt and
tangible assets acquired approximated $0.4 billion and $0.5 billion respective. The Purchaser
would like you to fair value Shockwave’s material identifiable intangible assets for certain
financial reporting and tax needs.
Equity Price
$0.8 Billion
Net Debt
$0.4 Billion
Enterprise Value
$1.2 Billion
Tangible Assets
$0.5 Billion
Intangible Assets
$0.7 Billion
15
Identified
Intangibles
 Tradename
 On-Demand
Technology
 Customer
relationships
 Broadcast License
 Program Content
 Assembled
Workforce
 Goodwill
OECD TP WP6: Illustrative Example of Intangible Asset Valuation


Valuation

Methodologies


Relief from Royalty
Excess Earnings
Cost
Greenfield
With or Without
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16. Introduction
Methodology Recap
Illustrative Example
Conclusion
Shockwave Corporation: Historical Operating Results
Historical Operations
•
1
•
2
•
3
•
4
5
•
6
•
Cashflow Statement
2005 2006 2007 2008
Regular subscription revenues have grown from $100
1 Revenue
Regular
102 305 508
million to $900 over the first 5 years of operations
On-Demand
102 305 508
Cost of sales for regular subscriptions reflect normal
2
COS
Regular
56 168 279
industry music content royalties and equate to 60% of
3
On-Demand
revenues
56 168 279
Direct costs for „On-Demand‟ subscriptions represents a
Gross Profit
46 137 229
non-variable cost and ranges between $800/min and
4 Operating Costs
10
15
40
60
$2,000/min for content development. Approximately
3
10
20
1,000 programs have been developed to date for a total 5 R&D
10
18
50
80
cost of $60 million
6 S&M
15
20
55
65
Operating, sales & marketing, and G&A expenses are
5
5
10
15
4 G&A
semi-variable in nature, approximately 60% of which is
EBITDA
(30)
3
22
69
labour costs (production, human resource, legal, sales,
3%
7% 14%
marketing, finance, and executive), with the balance
Depreciation
53
74
87
representing third-party consulting, marketing,
EBIT
(30) (50) (52) (18)
professional and facilities costs. These costs increase
Taxes
pro-rata with „On-Demand‟ revenues
Depreciation
(53) (74) (87)
Shockwave incurred approximately $60 million in R&D
Capex
200 170 150 120
spending to develop the „On-Demand‟ technology
Working Capital
8
16
16
platform over a 5 year period
(230) (175) (144) (68)
General brand marketing costs approximate 2/3rds of
7
Statement of Financial Position
the total sales and marketing spend, which approximates
Net Working Capital
76 Net Debt
12% to 13% of revenues
7
• Financial position includes $76 million of working capital,
$438 million of PP&E, and $400 million of net debt
16
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
Broadcasting PP&E
Total Assets
438 Equity
514 Liabilities & Equity
2009 2010
813 900
45
813 945
447 495
20
40
467 535
346 410
80
85
15
12
95
97
100 120
20
24
131 169
16% 18%
92
96
38
73
(92) (96)
110 110
24
11
(4) 48
400
114
514
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17. Introduction
Methodology Recap
Illustrative Example
Conclusion
Shockwave Corporation: Acquisition Forecast
Acquisition Forecast
• Regular subscription revenues are expected to grow
1
5% annually
Cashflow Statement
Revenue
Regular
2
On-Demand
1
• On-Demand subscriptions are expected to increase
2
3
from 5% of the customer-base in 2010 to 7.5% in 2011,
before leveling at 10% beyond 2012
• Approximately $30 million of On-Demand content will
3
be developed annually to replace the 1/3rd that will
become obsolete annually, and grow the business
4
5
4
• Operating, Sales & Marketing, and G&A expenses are
expected to grow between 2%-3% annually
4
• Due to continual technological changes in transmission
5
and receiving technology, Shockwave re-writes
approximately 20% of the software's algorithm code on
an annual basis
6
• The Purchaser cannot avail themselves of historical tax
6
losses, and expects to pay taxes at a rate of 35%
7
7
• Capital expenditures are expected to replace
broadcasting equipment depreciating 20% annually
• Non-cash working capital investments of 8% of
8
revenues
9
• Long-term growth is expected to equal 2% to 3%
10 The internal rate of return of 12% reflects a market•
based WACC, an after-tax cost of debt between 5%-6%
and a cost of equity between 15% to 16%
17
8
9
10
2011 2012 2013 2014 2015 Residual
945
992 1,042 1,094 1,149
1,206
71
99
104
109
115
121
1,016 1,091 1,146 1,203 1,264
1,327
COS
Regular
520
546
573
602
632
663
On-Demand
30
30
30
35
35
35
550
576
603
637
667
698
Gross Profit
466
516
543
567
597
628
Operating Costs
100
103
105
108
110
113
R&D
12
12
13
13
13
14
112
115
118
121
124
127
S&M
137
140
144
148
151
155
G&A
25
26
26
27
28
28
EBITDA
192
235
255
272
294
318
19%
22%
22%
23%
23%
24%
Depreciation
98
98
98
99
99
99
EBIT
95
137
157
173
195
219
Taxes
33
48
55
60
68
77
Depreciation
(98)
(98)
(98)
(99)
(99)
(99)
Capex
100
100
100
100
100
100
Working Capital
6
6
4
5
5
5
53
81
96
107
121
137
Long-term growth
2.5%
Residual Value
1,438
Discount Periods
0.5
1.5
2.5
3.5
4.5
4.5
Discount Factor
12.0%
0.9
0.8
0.8
0.7
0.6
0.6
Present Value
50
68
72
72
73
863
Enterprise Value
1,199
Net Debt
400
Fair Value of Shares
799
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
©THE CANADIAN INSTITUTE OF CHARTERED BUSINESS VALUATORS

18. Introduction
Methodology Recap
Illustrative Example
Conclusion
Shockwave Corporation: Diligence Information
Customers
“On-Demand”
Technology
License
Tradename
“On-Demand”
Content
Workforce
18
• Subscribers are renewing at a rate of 80% • Approximately 2/3rds of S&M costs are
annually, which is consistent with other
marketing related, with 1/3rd attributable to new
marketplace participants
customer acquisition and selling costs
• Management could recreate the technology • Given the annual updates to 20% of the
at the same cost, with an accelerated
technology, the estimated life of the existing
development timetable of 3 rather than 5
technology approximates 5 years
years
• Given the newness of the industry, new
entrants would follow the same pattern of
market share growth once licensed.
• Capital providers for radio start-ups expect a
return on investment of approximately 20%
• B2B unbranded competitor product
offerings are half the price, and accrue
2/3rds the annual marketing spending
• Research of arm‟s length tradename
arrangements evidences royalties of 4% for
telecom retailers, 4% on retail products, 6% for
food services, and 2% for technology resellers
• Operating costs in 2005 related to licensing
activities
• Approximately 20% of the content
developed in 2010 is outdated, and 5% of
the content is inactive/unused
• Costs approximate $1000/min for parenting &
health modules (30 min), $1,500/min for 30 min
finance & motivational modules and 60 min
biographies, and $2,500 for 60 min history
modules
• Recruiting costs for operations staff
• New hires are 50% as productive as existing
approximate 10% of salary, 15% for R&D and staff over a 6 month training period for R&D
S&M staff, and 20% for G&A staff
and G&A staff, and a 3 month period for
operations and S&M staff
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
© 2009 Deloitte Touche VALUATORS
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19. Introduction
Methodology Recap
Illustrative Example
Conclusion
Shockwave Corporation: Diligence Information
Intangible
Asset
Tradenames
Relief from
Royalty
Excess
Earnings
Rationale

• Replacement costs available
• Costs and time not prohibitive

• Only acceptable method
• No independent cashflows or
observable market
• No observable market or ability to
replace independently
• Impacts overall cashflows for the
business without an ability to
disaggregate

License
19
With or
Without
• Availability of comparable and
observable royalties
Workforce
Technology
Greenfield

Content
Customers
Cost

• No observable market or ability to
replace independently
• Independent direct cashflows are
capable of being estimated and
disaggregated from total cashflows

• No observable market
• Independent direct cashflows are
capable of being estimated and
disaggregated from total cashflows
• Costs and time to recreate are
capable of being estimated
OECD TP WP6: Illustrative Example of Intangible Asset Valuation

© 2009 Deloitte Touche VALUATORS
©THE CANADIAN INSTITUTE OF CHARTERED BUSINESS Tohmatsu

20. Introduction
Methodology Recap
Conclusion
Illustrative Example
Shockwave Corporation: Tradename – Relief from Royalty
Tradename ($millions)
2011 2012 2013 2014 2015 Residual
Revenues
1,016 1,091 1,146 1,203 1,264
1,327
1
Royalty Rate
3.50% 3.50% 3.50% 3.50% 3.50%
3.50%
2
Royalty Savings
36
38
40
42
44
46
Taxes
35.0%
(12)
(13)
(14)
(15)
(15)
(16)
After-Tax Royalty Savings
23
25
26
27
29
30
3 216
Long-term Growth
2.5%
Discount Periods
0.5
1.5
2.5
3.5
4.5
4.5
Discount Factor
16.5% 4 0.93
0.80
0.68
0.59
0.50
0.50
Present Value
21
20
18
16
14
108
Total
198
5
TAB
29
4
Discount Rate
Fair Value
227
• Cost of equity
• Indefinite life
5
Tax Basis
• Assumption of depreciable
tax basis for asset
• Revenue growth risk
• Brand recognition, competition,
and margin
1
Revenues
• Based on forecast for all branded
revenues
2
Royalty Rate
• Comparable research range of
2% to 6%
Brand Margin B2B Retail Diff
Product Price
50 100 50
Marketing Cost
6
8
3
Net Profit
44
92 47
%
89% 92% 3%
3
Life
• Assumption of an indefinite life
• WARA
20
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© 2009 Deloitte Touche VALUATORS
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21. Introduction
Methodology Recap
Illustrative Example
Conclusion
Shockwave Corporation: Content – Cost Approach
1
2
Replacement Cost (new)
• Assumed no inflation from the
original costs to develop in 2010
Functional Obsolescence
• Assumption that these modules would be
replicated in an updated version if replaced
1
2
Replacement
Depreciated
Module
# of
Cost/Min Cost New
Replacement
Type (Mins) Modules
($)
($mill)
Outdated Inactive Cost ($mill)
Parenting
30
150
1,000
4.5
15
8
3.8
Health
30
175
1,000
5.3
18
9
4.5
Finance
30
300
1,500
13.5
100
20
8.1
Motivational
30
125
1,500
5.6
13
6
4.8
Biographies
60
100
1,500
9.0
25
5
6.3
History
60
150
2,500
22.5
25
8
17.6
1,000
60.4
195
55
45.1 5
4
4
5
Economic Obsolescence
• Assumption that these modules would not
generate future economic returns if replaced
Depreciated Replacement Cost
• Assumption that any tax benefits and
costs would offset (embedded TAB ~$7
million)
• Assumption that there are no additional
opportunity costs (i.e. significant time
investment)
21
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© 2009 Deloitte Touche VALUATORS
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22. Introduction
Methodology Recap
Conclusion
Illustrative Example
Shockwave Corporation: License – Greenfield Approach
Revenue
Regular
On-Demand
COS
Regular
On-Demand
Gross Profit
Operating Costs
R&D
S&M
G&A
EBITDA
Capex
Working Capital
2011
102
102
56
56
46
15
3
18
35
5
(12)
-12%
370
8
(390)
2012
305
305
168
168
137
40
10
50
55
10
22
7%
150
16
(144)
Residual Value
Discount Periods
0.5
1.5
Discount Factor
20% 3 0.9
0.8
Present Value
(356) (110)
Total
38
Tax Amortization Benefit
5 4
Fair Value of License
43
22
2013
508
508
279
279
229
60
20
80
65
15
69
14%
120
16
(68)
2.5
0.6
(43)
2014
813
813
447
20
467
346
80
15
95
100
20
131
16%
110
24
(4)
3.5
0.5
(2)
2015 Residual
900
45
945
495
40
535
410
85
12
1
97
120
24
169
18%
110
11
48
1,199 2
4.5
4.5
0.4
0.4
21
528
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
1
Revenues
• Assumed original 2005 through 2010
start-up costs would be equally
applicable as at valuation date, including
ramp-up and commercialization pattern,
margins, and capital costs, with the
exception of:
• Reduced time-period by 1 year,
assuming 2005 activities could be
truncated
• Excluded year 1 start-up costs for
G&A and operations ($15 million),
assuming these costs relate to
licensing activities
2
Residual Value
• Based on current purchase price
as representative of exit value
3
Discount Rate
• Reflective of „start-up‟ type
required rates of return
4
Tax Basis
• Assumption of depreciable tax
basis for asset
© 2009 Deloitte Touche VALUATORS
©THE CANADIAN INSTITUTE OF CHARTERED BUSINESS Tohmatsu

23. Introduction
Methodology Recap
Illustrative Example
Conclusion
Shockwave Corporation: Workforce – Cost Approach
2
3
Recruiting Costs
• Costs to find and replace workforce based on
normal search and hire costs
• Opportunity cost of salary incurred over period
new hires would be unproductive or underutilized
2
Workforce # of FTEs
Operations
630
R&D
130
S&M
330
G&A
60
Total
1,150
Avg. Salary
($000)
80
75
90
200
101,850
Training Costs
3
Recruitment Recruitment Unproductive Training Replacement Replacement
Cost (% of
Cost
Training Period
Cost
Cost
Cost
Salary)
($000/FTE)
(months)
($000/FTE) ($000/FTE)
($millions)
10%
8
1.5
10
18
11
15%
11
3.0
19
30
4
15%
14
1.5
11
25
8
20%
40
3.0
50
90
5
4
29
1
4
1
Workforce
• Assumed all employees are required to
generate value, and are compensated at FMV
23
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
Depreciated Replacement Cost
• Assumption that any tax benefits and
costs would offset (embedded TAB ~$7
million)
• Assumption that there are no additional
opportunity costs (i.e. significant time
investment)
© 2009 Deloitte Touche VALUATORS
©THE CANADIAN INSTITUTE OF CHARTERED BUSINESS Tohmatsu

24. Introduction
Methodology Recap
Conclusion
Illustrative Example
Shockwave Corporation: Customers – Excess Earnings
Revenues
1
Customer Erosion
20.0%
Existing Customer Rev.
COGS
Operations
3
S&M
0.0%
G&A
2
EBITDA
Depreciation
EBIT
Taxes
35.0%
Fixed Assets
3.3%
Brand
2.3%
Working Capital
0.7%
4
License
0.8%
Workforce
0.3%
Discount Periods
Discount Factor 5
Present Value
Discrete Period
Residual
Total
TAB
6
Fair value
15.0%
144
31
175
28
203
2011
945
80%
756
440
74
19
223
73
151
53
25
17
5
6
3
42
0.5
0.93
39
2012 2013 2014 2015 2016
992 1,042 1,094 1,149 1,206
64%
51%
41%
33%
26%
635
533
448
376
316
368
309
261
218
183
60
49
40
33
27
15
12
10
8
7
192
164
137
117
99
57
46
37
29
24
135
118
100
87
76
47
41
35
31
27
21
18
15
13
11
14
12
10
9
7
4
4
3
3
2
5
4
4
3
3
2
2
2
1
1
40
37
32
29
26
1.5
2.5
3.5
4.5
5.5
0.81
0.71
0.61
0.53
0.46
33
26
20
15
12
5
Revenues
• Based on overall forecast revenues for
the business, assuming:
•
Existing subscribers will experience
20% annual attrition
•
Existing subscribers revenues, net of
attrition, will growth at the same rate
as new subscribers
•
On-demand revenues are attributable
to technology rather than customers
2
Costs
• COGS, operating costs, G&A, and
depreciation assumed to attribute to
existing customer revenues on a pro-rata
basis with new customer revenues
3
S&M Costs
• S&M costs excluded assuming no
incremental selling costs to existing
customers, and a brand CAC to cover
general marketing
Discount Rate
• Reflects cost of equity, adjusted
for risk profile
6
1
4
Contributory Asset Charges
• Next Slide
Tax Basis
• Assumption of depreciable tax
basis for asset
24
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
© 2009 Deloitte Touche VALUATORS
©THE CANADIAN INSTITUTE OF CHARTERED BUSINESS Tohmatsu

25. Introduction
Methodology Recap
Conclusion
Illustrative Example
Shockwave Corporation: Contributory Asset Charges
1
Opening PP&E
Capex
Depreciation
20.0%
Ending PP&E
Return On
8.0%
Revenues
CAC - PP&E
3.3%
2
Opening Working Capital
Change
Ending Working Capital
Return On
3.3%
Revenues
CAC - PP&E
0.7%
3
Opening Content
New Content
Depreciation
40.0%
Ending Content
Return On
15.0%
Revenues
Return On %
Return Of
Return Of %
CAC - Content
27.3%
2011
438
100
98
440
35
945
3.7%
2012 2013 2014 2015 Residual
440
442
444
445
446
100
100
100
100
100
98
98
99
99
99
442
444
445
446
447
35
35
36
36
36
992 1,042 1,094 1,149
1,206
3.6% 3.4% 3.3% 3.1%
3.0%
76
6
81
6
945
0.7%
81
87
92
96
6
4
5
5
87
92
96
101
7
7
8
8
992 1,042 1,094 1,149
0.7% 0.7% 0.7% 0.7%
45
30
30
45
7
71
10%
20
28%
37%
45
30
30
45
7
99
7%
20
20%
26%
45
30
30
45
7
104
6%
20
19%
25%
4
Tradename Pre-tax
Tradename After-tax
25
4 3.5%
2.3%
45
35
32
48
7
109
6%
21
19%
25%
48
35
33
50
7
115
6%
22
19%
25%
101
5
106
8
1,206
0.7%
50
35
34
51
8
121
6%
22
18%
25%
Tradename CAC
• Based on after-tax royalty
rate used to value asset
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
1
PP&E CAC
• Represents “Return On” investment in PP&E only,
as “Return Of” investment in PP&E considered in
the Excess Earnings via depreciation
• Required “Return On” investment rate based on
consideration of ABL rates (i.e. mortgages, leases,
senior debt, secured lending, etc.)
• CAC as a percentage of total revenues over which
asset accrues its returns
2
Working Capital CAC
• Represents “Return On” investment in working
capital only, as the asset does not waste
• Required “Return On” investment rate based on
consideration of short-term borrowing rates
• CAC as a percentage of total revenues over which
asset accrues its returns
3
Content CAC
• Represents “Return On” and “Return Of”
investment, as replacement of the asset is not
otherwise explicitly captured in the Excess
Earnings
• Required “Return On” investment rate based on
consideration of cost of equity, risk profile of the
asset, and WARA
• CAC as a percentage of On-Demand revenues
where the asset accrues its returns
© 2009 Deloitte Touche VALUATORS
©THE CANADIAN INSTITUTE OF CHARTERED BUSINESS Tohmatsu

26. Introduction
Methodology Recap
Conclusion
Illustrative Example
Shockwave Corporation: Technology – With and Without
Regular
On-Demand
1
Revenues
Regular
On-Demand
COGS
Operations
S&M
G&A
R&D 3
EBITDA
Depreciation
EBIT
Taxes
35%
After-tax earnings
Capital Expenditures
Working Capital
2011
945
945
520
520
93
127
23
20
162
98
64
22
139
100
4
36
Long-term Growth 2.5%
Discount Periods
0.5
Discount Factor 5 13.5%
0.94
Present Value
33
Without Technology
1,038 6
With Technology
1,199
Technology Value
161
TAB
28
Fair Value
188
26
Revenues
2012 2013 2014 2015 Residual 1
• Based on overall forecast revenues for the
992 1,042 1,094 1,149
business, excluding on-demand revenues
55
86
assuming:
992 1,042 1,149 1,235
546
573
602
632
• Pre-revenue „build‟ period of 3 vs. 5 year
35
35
• Equivalent ramp-up pattern towards 10% of
546
573
637
667
regular subscribers
93
96
103
108
2
Costs
128
131
141
148
• COGS, Operating Costs, S&M, G&A based on
23
24
26
27
proration of total revenues between regular vs.
20
20
13
13
2
on-demand business – assumed incremental to
182
199
230
272
on-demand business (capital costs excluded)
98
98
99
99
84
100
131
173
3
R&D Costs
29
35
46
61
• Assumed original $60 million
153
164
184
212
development costs to be incurred over 3
100
100
100
100
vs. 5 year period
4
4
9
7
49
60
75
105
4
Residual
1,438 4
• Reflects original residual value
1.5
2.5
3.5
4.5
4.5
after ramp-up period (including
0.83
0.73
0.64
0.57
0.57
WACC)
41
43
48
59
813
6
With vs Without
• Deduct value of business with
technology vs. without
• Assumption of depreciable tax
basis for asset, not businesses
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
5
Discount Rate
• Reflects heightened risk to
overall business over ramp-up
period
© 2009 Deloitte Touche VALUATORS
©THE CANADIAN INSTITUTE OF CHARTERED BUSINESS Tohmatsu

27. Introduction
Methodology Recap
Conclusion
Illustrative Example
Shockwave Corporation: Technology – Excess Earnings
Revenues 1
COGS
2
Operations
5 Development
S&M
3
G&A
EBIT
Taxes
Brand
Content
License
6
Workforce
PP&E
Working Capital
Cashflow
Long-term Growth
Residual
Discount Periods
Discount Factor 7
Present Value
Total
TAB
Fair Value
7
2011
71
7
12
33.3% 4 3
2
47
16
2.3%
2
27.3%
19
0.8%
1
0.3%
0
0.0%
0.7%
0
8
2.5%
16.5%
0.5
0.93
8
2012
99
2013
104
2014
109
9
12
4
2
71
25
2
27
1
0
10
13
4
2
75
26
2
28
1
0
10
13
4
2
80
28
2
30
1
0
-
1
15
1.5
0.80
12
1
16
123
18
141
Discount Rate
• Reflects cost of equity, WARA, risk profile
of asset, and heightened risk of future
development/perpetual life
27
10
13
5
3
84
30
3
31
1
0
-
1
17
2.5
0.68
11
2015 Residual
115
121
3.5
0.59
10
10
14
5
3
89
31
3
33
1
0
-
1
19
1
20
4.5
0.50
9
145
4.5
0.50
73
1
Revenues
• Based on total on-demand forecast revenues
assuming:
•
Perpetual life – no obsolescence
•
Regular subscriber revenues excluded -attributable to other assets (i.e. customer
value) – akin to a CAC
2
Content Costs
• Considered as part of Content
CAC (return „on‟ and „of‟),
including reinvestment
3
Costs
• Operating Costsand G&A based on proration of
total revenues between regular vs. on-demand
business – assumed incremental to on-demand
business
4
S&M Costs
• Assumed
of S&M costs represents selling
costs attributable to on-demand business based
on pro-rata revenues
1/3rd
• Assume brand CAC to cover general marketing
6
5
CACs
• Reflects required returns on and
of contributory assets, but:
• Excludes PP&E
Development Costs
• All development costs to
maintain and extend life of
technology included
• Includes Content
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
© 2009 Deloitte Touche VALUATORS
©THE CANADIAN INSTITUTE OF CHARTERED BUSINESS Tohmatsu

28. Introduction
Methodology Recap
Conclusion
Illustrative Example
Shockwave Corporation: Technology – Finite Life
2011
Revenues
71
Migration Factor 20.0%
90%
1 64
Existing Technology
COGS
2
Operations
6
S&M
33.0% 4 3
3
G&A
2
EBIT
53
Taxes
19
Brand
2.3%
1
Content
27.3%
17
License 6
0.8%
1
Workforce
0.3%
0
Working Capital
0.7%
0
Cashflow
14
Long-term Growth -15.2%
Residual
Discount Periods
0.5
Discount Factor 7 13.5%
0.94
Present Value
14
Total
68
TAB
12
Fair Value
80
5
7
2012
99
72%
71
2013
104
58%
60
2014
109
46%
50
2015 Residual
115
121
37%
29%
42
36
7
3
2
60
21
2
20
1
0
0
17
14%
6
2
1
51
18
1
16
0
0
0
14
-15%
5
2
1
43
15
1
14
0
0
0
12
-15%
4
2
1
36
13
1
12
0
0
0
10
-15%
1.5
0.83
14
2.5
0.73
10
Discount Rate
• Reflects cost of equity, WARA, risk profile
of asset, and heightened risk of future
development/perpetual life
28
3.5
0.64
8
4.5
0.57
6
3
1
1
30
11
1
10
0
0
0
9
-15%
30
4.5
0.57
17
1
Revenues
• Based on total on-demand forecast revenues
assuming:
•
20% annual migration/obsolescence
•
Regular subscriber revenues excluded -attributable to other assets (i.e. customer
value) – akin to a CAC
2
Content Costs
• Considered as part of Content CAC (return „on‟
and „of‟), including reinvestment
3
Costs
• Operating Costs and G&A based on proration of
total revenues between regular vs. on-demand
business – assumed incremental to on-demand
business
4
S&M Costs
• Assumed 1/3rd of S&M costs represents selling
costs attributable to on-demand business based
on pro-rata revenues
• Assume brand CAC to cover general marketing
5
6
CACs
• Reflects required returns on and
of contributory assets, but:
Development Costs
• All development costs extend life
of technology excluded
• Excludes PP&E
• Includes Content
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
© 2009 Deloitte Touche VALUATORS
©THE CANADIAN INSTITUTE OF CHARTERED BUSINESS Tohmatsu

29. Introduction
Methodology Recap
Conclusion
Illustrative Example
Shockwave Corporation: Weighted Average Returns Analysis
1
Tangible Assets
• Based on after-tax cost of
debt, including short-term
borrowings and ABL rates
1
2
3
4
WARA -- With or Without Approach
Return Contribution
Asset
Value (After-tax) to WACC
Working Capital
76
2.9%
0.2%
Fixed Assets
438
6.5%
2.4%
Brand
198
16.5%
2.7%
Technology
161
13.5%
1.8%
Content
38
15.0%
0.5%
Customers
175
15.0%
2.2%
License
32
15.5%
0.4%
Workforce
24
13.5%
0.3%
Goodwill
80
22.9%
1.5%
Enterprise Value 1,199
WACC
12.0%
3
Technology
• Based on cost of equity, adjusted for:
• Life (indefinite vs finite)
2
• Based on cost of equity, adjusted
for risk profile and finite vs.
indefinite life nature of assets
WARA -- Excess Earnings Approach (Indefinite Life)
Return Contribution
Asset
Value (After-tax) to WACC
Working Capital
76
2.9%
0.2%
Fixed Assets
438
6.5%
2.4%
Brand
198
16.5%
2.7%
Technology
123
16.5%
1.7%
Content
33
15.0%
0.4%
Customers
175
15.0%
2.2%
License
28
15.5%
0.4%
Workforce
21
13.5%
0.2%
Goodwill
108
20.3%
1.8%
Enterprise Value 1,199
WACC
12.0%
3
• Represents time-weighted
average start-up return of 20%
and 12% terminal value return
WARA -- Excess Earnings Approach (Finite Life)
Return Contribution
Asset
Value (After-tax) to WACC
Working Capital
76
2.9%
0.2%
Fixed Assets
438
6.5%
2.4%
Brand
198
16.5%
2.7%
Technology
68
13.5%
0.8%
Content
33
15.0%
0.4%
Customers
175
15.0%
2.2%
License
28
15.5%
0.4%
Workforce
21
13.5%
0.2%
Goodwill
163
20.3%
2.8%
Enterprise Value 1,199
WACC
12.0%
Weighted Average Cost of Capital
Value
RRR Contribution
• Purpose and
decision:
• Build vs. Buy
• Development risk
29
Brand
Technology
• Goodwill rate of return
• Existing finite life
vs indefinite future
development
rights
• Incremental risk to overall
business without technology,
including residual value
4
Intangibles
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
Working Capital
LT Debt
Equity
75
325
800
1,200
2.9%
6.0%
15.5%
12.0%
0.2%
1.6%
10.3%
12.0%
© 2009 Deloitte Touche VALUATORS
©THE CANADIAN INSTITUTE OF CHARTERED BUSINESS Tohmatsu

30. Introduction
Methodology Recap
Illustrative Example
Conclusion
Shockwave Corporation: Reasonability Check
Tradenames are the most valuable asset, followed by customer
relationships, then technology
Goodwill rate of return is above intangible rates of return
Goodwill rate of return is consistent with a start-up type rate of return
for the industry
The Technology is twice as valuable as its original cost
Required rates of returns for all assets are consistent with their risk
profile
Goodwill approximates 10% of the purchase price (i.e. why pay for
goodwill?)
30
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
© 2009 Deloitte Touche VALUATORS
©THE CANADIAN INSTITUTE OF CHARTERED BUSINESS Tohmatsu

31. Introduction
Methodology Recap
Illustrative Example
Conclusion
QUESTIONS?
31
OECD TP WP6: Illustrative Example of Intangible Asset Valuation
© 2009 Deloitte Touche VALUATORS
©THE CANADIAN INSTITUTE OF CHARTERED BUSINESS Tohmatsu